Student-Debt Rise Concentrated Among Those With Poor Credit

The nation’s sharp rise in student debt is being driven largely by Americans with poor credit, new data show.

Overall student debt rose 12% to $1.08 trillion in 2013, the Federal Reserve Bank of New York said in a report released Tuesday. Student debt is the second-largest form of household credit after mortgages.

Student debt has risen rapidly since the recession, as many Americans enrolled in school to escape a weak labor market. Also, other funding sources—such as home equity and household savings—diminished after the housing crash, forcing a greater share of students to borrow.

A new analysis by the New York Fed shows the rise hasn’t been universal across groups with different credit profiles.

Of the 12% overall rise in student debt, a third—or four percentage points—came from borrowers with the worst credit history, or those with credit scores of 620 or lower. About five percentage points came from those with scores between 621 and 680, and roughly two points was from those in the middle quintile—scores between 681 and 720. Only about one percentage point came from those in the 720-to-780 range. And among those with scores above 780, student debt was flat.

The data suggest more Americans—particularly those with poor credit–are going to school to gain new skills, which eventually could lead to better jobs and higher earnings. Other data show that those with college degrees are much less likely to be unemployed and earn far more than those with only high school diplomas.

But delinquencies among student borrowers are rising, a development that could inflict further damage on borrowers’ credit. That could make it harder for student borrowers to qualify for loans to purchase cars, homes and other items.

Roughly 11.5% of student-loan balances were delinquent in the fourth quarter of 2013, meaning a payment hadn’t been made in at least 90 days, the New York Fed said. That’s up from a delinquency rate of about 8.5% two years earlier.

The New York Fed doesn’t break down the delinquency rate on student loans among borrowers of different credit scores.

Student loans have the highest delinquency rate among any form of household debt. And the official delinquency rate likely understates the problem, since many borrowers are still in school and thus don’t have to make payments yet. Excluding those borrowers from the overall pool of student debt would likely increase the delinquency rate.

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